MACROECONOMICS (LL)
21st Edition
ISBN: 9781260186949
Author: McConnell
Publisher: MCG
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Chapter 11, Problem 2P
To determine
Savings and Investment.
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Assume that GDP (Y ) is 5,000 in a closed economy. Consumption (C) is given by the equationC = 1,200 + 0.6(Y −T)−100r, where r is the real interest rate, in percent. Investment (I) is givenby the equation I = 2,000 − 200r. Taxes (T) are 1,000, and government spending (G) is 1,500.(a) What are the equilibrium values of C, I, and r? (b) What are the values of private saving, public saving, and national saving? (c) For the given consumption function, what does the relationship between consumption and theinterest rate imply about the saving schedule?
Suppose the following equations represents a closed economy:
Y= C + I + G
Y = 4000
G = 500
T = 500
C = 500 + 0.7 (Y – T)
I = 1000 – 40r
In this economy, compute the value of consumption (C), private saving, public saving, and national saving. Also, find the equilibrium interest rate (r).
Now suppose that government spending (G) rises (expansionary fiscal policy) to 300. Compute private saving, public saving, and national saving. Also, find the new equilibrium interest rate (r).
In part (b), due to expansionary fiscal policy (increase in government spending), which of the two other components of aggregate demand changes, C or I? Why? (Hint: Note the real interest rate)
ADVANCED ANALYSIS Assume that the consumption schedule for a private open economy is such that consumption is:
C = 100 + 0.75Y
Assume further that planned investment Ig and net exports Xn are independent of the level of real GDP and constant at Ig = 60 and Xn = 10. Recall also that, in equilibrium, the real output produced (Y) is equal to aggregate expenditures:
Y = C + Ig + Xn
Instructions: Round your answers to the nearest whole number.a. What is the equilibrium level of income or real GDP for this economy?
Equilibrium GDP (Y) = $ .
b. What happens to equilibrium Y if Ig changes to 40?
Equilibrium GDP (Y) = $ .
What does this outcome reveal about the size of the spending multiplier?
Spending multiplier = .
Chapter 11 Solutions
MACROECONOMICS (LL)
Ch. 11.2 - Prob. 1QQCh. 11.2 - Prob. 2QQCh. 11.2 - Prob. 3QQCh. 11.2 - Prob. 4QQCh. 11.7 - Prob. 1QQCh. 11.7 - Prob. 2QQCh. 11.7 - Prob. 3QQCh. 11.7 - Prob. 4QQCh. 11 - Prob. 1DQCh. 11 - Prob. 2DQ
Ch. 11 - Prob. 3DQCh. 11 - Prob. 4DQCh. 11 - Prob. 5DQCh. 11 - Prob. 6DQCh. 11 - Prob. 7DQCh. 11 - Prob. 8DQCh. 11 - Prob. 1RQCh. 11 - Prob. 2RQCh. 11 - Prob. 3RQCh. 11 - Prob. 4RQCh. 11 - Prob. 5RQCh. 11 - Prob. 6RQCh. 11 - Prob. 7RQCh. 11 - Prob. 8RQCh. 11 - Prob. 9RQCh. 11 - Prob. 1PCh. 11 - Prob. 2PCh. 11 - Prob. 3PCh. 11 - Prob. 4PCh. 11 - Prob. 5PCh. 11 - Prob. 6PCh. 11 - Prob. 7PCh. 11 - Prob. 8PCh. 11 - Prob. 9PCh. 11 - Prob. 10P
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- Assume an economy with 1000 consumers. Each consumer has income in the current period of 50 units and future income of 60 units, and pays a lump-sum tax of 10 in the current period and 20 in the future period. The market real interest rate is 8%. Of the 1000 consumers, 500 consume 60 units in the future, while 500 consume 20 units in the future. Determine each consumer’s current consumption and current saving. Current Consumption: Current Saving: Determine aggregate private saving, aggregate consumption in each period, government spending in the current and future periods, the current-period government deficit, and the quantity of debt issued by the government in the current period. Aggregate Private Saving Aggregate Consumption Government spending: Current Future Current period government deficit Quantity of debtarrow_forwardThe following table contains data for a hypothetical closed economy that uses the dollar as its currency. Suppose GDP in this country is $1,175 million. Enter the amount for government purchases. National Income Account Value Government Purchases (GG) Taxes minus Transfer Payments (TT) 225 Consumption (CC) 625 Investment (II) 300 Complete the following table by using national income accounting identities to calculate national saving. In your calculations, use data from the preceding table. National Saving (S) = = $ million Complete the following table by using national income accounting identities to calculate private and public saving. In your calculations, use data from the initial table. Private Saving = = $ million Public Saving = = $ million Based on your calculations, the government is running a budget (a. surplus, b. deficit).arrow_forwardWhat would be the level of saving if the real GDP (Y) were at $7 trillion? what is the level of desired investment at this level? What forces are at work at a real GDP of $7 trillion? What will be the equilibrium level of real GDP?arrow_forward
- Assume that total expenditure E comprises the sum of government consumption, G, household consumption, C, and investment, I. Assume a closed macroeconomic system, so that income equals expenditure Y=E. If we define household saving, SH, as SH=Y-T-C, where the cunsumption function is a fixed proportion of disposable income, C=c(Y-T), which of the following will be true? a. Higher government spending alongside unchanged taxation will lead to higher investment and higher household saving b. Higher government spending alongside unchanged taxation will have no effect on household saving or investment c. Higher government spending alongside unchanged taxation will lead to higher household saving d. Higher government spending alongside unchanged taxation will lead to lower household savingarrow_forwardThe following table shows data for the economy before the decrease in saving. Suppose that the decrease in saving causes consumption to rise from $280 million to $320 million. Assume Say's law holds in this economy. Fill in the data for the economy after the decrease in saving. Before Saving Decrease After Saving Decrease Consumption (C) $280 million $320 million Investment (I) $200 million $ million Government Purchases (G) $250 million $ million Exports (EX) $500 million $500 million Imports (IM) $300 million $300 million As a result of the decrease in saving, total expenditures will .arrow_forwardSuppose in a closed economy with positive national saving, consumption is 70% of GDP, taxes net of transfers are 30% of total consumption and investment, and government spending is less than investment. Which of the following statements is true? (a) Public saving is greater than private saving. (b) Private saving is 9% of GDP. (c) Public saving is less than 10% of GDP. (d) Investment is less than 10 Also give Why other False.arrow_forward
- Why is saving called a leakage? Why is planned investment called an injection? Why must saving equal planned investment at equilibrium GDP in the private closed economy? Are unplanned changes in inventories rising, falling, or constant at equilibrium GDP? Explain.arrow_forwardAssume that total expenditure E comprises the sum of government consumption, G, household consumption, C, and investment, I. Assume a closed macroeconomic system, so that income equals expenditure Y=E. If we define household saving, SH, as SH=Y-T-C, where Y is national income and T is total taxation, which of the following will be true? a. SH=I+G b. SH=I-G-T c. SH=I+(G-T) d. SH=Iarrow_forwardIn a closed economy with fixed prices and wages and where the marginal propensity to consume of the rich is smaller than that of the poor, a transfer of income from the rich to the poor will 3 a. Increase equilibrium level of output but reduce private savings b. Decrease equilibrium level of output but increase private savings c. Increase in output and an increase private savings d. Decrease in output and a decrease in private savingsarrow_forward
- 1.In Figure 1, when disposable income is 0, how much is consumption, saving, autonomous consumption, and induced consumption? 2.In Figure 1, when disposable income is 2500, how much is consumption, saving, autonomous consumption, and induced consumption? 3.In Figure 1, when disposable income is 4,000, how much is the consumption, savings, autonomous consumption and induced consumption?arrow_forwardADVANCED ANALYSIS Assume that the consumption schedule for a private closed economy is such that consumption is: C = 100 + 0.75Y Assume further that planned investment Ig is independent of the level of real GDP and constant at Ig = 50. Recall also that, in equilibrium, the real output produced (Y) is equal to aggregate expenditures: Y = C + Ig Instructions: Enter your answers as whole numbers.a. Calculate the equilibrium level of income or real GDP for this economy. Equilibrium GDP (Y) = $ . b. What happens to equilibrium GDP if Ig changes to 60? Equilibrium GDP (Y) = $ . What does this outcome reveal about the size of the spending multiplier? Spending multiplier = .arrow_forwardtable below shows levels of employment, output, consumption, and saving for a private closed economy. Possible Levels of Employment, Millions Real Domestic Output,Billions Consumption,Billions Saving,Billions 40 $ 240 $ 244 -$ 4 45 260 260 0 50 280 276 4 55 300 292 8 60 320 308 12 65 340 324 16 70 360 340 20 75 380 356 24 80 400 372 28 Instructions: Enter your answers as a whole number. Using the consumption and saving data above and assuming planned investment is $16 billion, answer the following questions: a. What are saving and planned investment at the $380 billion level of domestic output? Investment = $ billionarrow_forward
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